Motley Fool Money: 01.24.2014

Effective communication skills are essential in business and life, and the Think Fast, Talk Smart podcast can help listeners hone these skills. Microsoft had a strong quarter with record-breaking revenue, particularly in its enterprise business and server cloud division. The company's transition to becoming a device company, with the help of acquisitions like Nokia, is a question mark, and the retirement of CEO Steve Ballmer adds uncertainty. Microsoft's 29% increase in stock value over the past 10 years is impressive, but it pales in comparison to Apple's 4,700% growth during the same period. The tech industry continues to see significant changes, and companies must adapt to stay competitive.

Both Microsoft and Starbucks reported strong financial results in their recent earnings reports. Microsoft posted a record revenue quarter, and Starbucks saw earnings per share growth of around 20% with revenue up 12% and profits up 25%. However, despite these impressive numbers, both stocks are considered expensive with high valuations. Microsoft's stock trades at 28 times expected earnings for the year ending September, while Starbucks' stock has seen a 40% increase since the beginning of 2013. Another notable factor is the power of Starbucks' rewards card program, which had $1.4 billion loaded on it last quarter, representing a significant upfront capital for the company to reinvest in its business. Despite the high valuations, both companies are seeing strong demand and growth potential, with Microsoft looking to make up ground in the mobile computing space and Starbucks underestimating its US store potential and expanding into new areas like Teavana, Live Bu Lounge, and Evolution Fresh.

Different business formats can thrive in various locations, and this was evident during the holiday season for Starbucks with a significant shift to online sales through their digital app. Netflix also reported a strong quarter with over 45 million subscribers and the addition of 2.3 million new subscribers. Their business model focuses on continuous subscriber growth, which allows them to maintain revenue despite increasing off-balance sheet obligations. However, concerns include reaching a membership ceiling and potential pricing issues. Netflix's CEO, Reed Hastings, made a misstep during the conference call with a joke about password sharing, which fell flat. McDonald's reported a 2% revenue increase but a slight decrease in global same-store sales, leaving investors wondering about the growth potential for the world's largest fast-food company. Despite having over 37,000 restaurants, McDonald's opened 1,400 new locations last year. Overall, these companies are navigating various challenges and opportunities in their respective industries.

McDonald's, despite facing challenges in the US market due to increasing competition and shifting consumer preferences towards healthier food options, remains a strong investment option due to its impressive returns. The company's return on equity stands at 37%, and its free cash flow is powerful and consistent. McDonald's is in a transitional period, especially in the US, where it accounts for about one-third of sales. The company is competing on three fronts: offering healthier food choices at value prices, enhancing its brand, and keeping margins steady. McDonald's trades at 16 times this year's expected earnings, and the main thesis for owning the stock is its 3.4% yield. The company is implementing a turnaround plan, focusing on its top brands, and making headway in cutting costs. However, concerns about slowing growth in emerging markets could impact gross margins. Meanwhile, Procter & Gamble's Q2 results were better than expected, and the company is implementing a turnaround plan by cutting costs and focusing on its top 40 brands. Coach's Q2 profits fell, and the company reported substantially lower foot traffic at North American stores. Overall, while there were some disappointing results from individual companies, the market experienced a rough week, and investors should keep a long-term perspective.

Despite challenging market conditions in North America, Coach is finding success in its international business, particularly in China, which is predicted to become a $1,000,000,000 business in the next 3 years. The upcoming debut of Stewart Vever's first line as the new designer in September could also help turn the tide for the company. However, uncertainty in the stock market and disappointing earnings reports from companies like IBM highlight the risks and challenges facing businesses, even those with strong histories of success. IBM, the largest Dow component, has missed revenue expectations for nine quarters in a row and has seen a decline in free cash flow in eight of the last 12 quarters. The company is using debt to finance share repurchases, a financial engineering strategy that some investors are wary of. These examples underscore the importance of adaptability and resilience in business, especially in the face of uncertainty and changing market conditions.

While the United States stock market and economy had a strong year in 2013, the emerging and frontier markets did not fare as well. During a discussion on Motley Fool Money, the hosts pondered over unique items they would like to see in a vending machine. While some suggested funnel cakes or different types of bacon, others joked about live crabs or even shucked oysters. However, the consensus was that practical items like nails or screws from Home Depot could be a viable business opportunity for a vending machine. Meanwhile, Bill Mann, the portfolio manager at Motley Fool Funds, shared that he was in London for a Deutsche Bank conference where he was meeting with companies from Eastern Europe and Russia to gain a better understanding of the macroeconomic situation in those countries. He noted that 2013 was not a great year for the emerging and frontier markets compared to the developed markets.

Emerging markets underperformed developed markets by approximately 30% in 2013, which was surprising given their role as saviors during the financial crisis in the late 2000s. This trend has raised concerns for 2014, as the performance of developed markets is believed to influence emerging markets. For individual investors and portfolio managers, a year of significant market gains can make it challenging to recalibrate expectations and find new investment opportunities. Bill Mann, portfolio manager at Motley Fool Funds, emphasizes the importance of remaining steadfast in investment principles and diversifying investments to increase investing acumen. Diversification, while often seen as a straightforward concept, requires careful consideration given the complexities of the investing world.

While diversification is important in investing, especially with the availability of cheap index funds, it's essential to balance it with making informed decisions and embracing discomfort. Every transaction comes with costs, and making too many decisions might outweigh the benefits. However, being in the stock market requires understanding that consensus opinions often come at a high price. Great companies can experience significant drops in value, and being able to buy them at those moments can lead to significant gains. Discomfort means recognizing that uncertainty exists, and it's during these times that investors should be most aggressive in finding undervalued companies with long-term growth potential. As demonstrated by Netflix and its CEO Reed Hastings, adaptability and learning from changing circumstances are crucial skills for investors.

Successful companies, whether based in the US or abroad, require strong leadership. Bill Mann, portfolio manager at Motley Fool Funds, emphasizes the importance of evaluating management when considering investment opportunities. He noted that while investor protection may not be as robust in certain countries, the three essential questions - is it a good company, is it attractively priced, and who's running it? - should be asked regardless of location. Mann also mentioned that foreign companies often compensate their management differently, which can result in finding high-quality leadership at a lower cost. Regarding specific companies, Mann discussed Netflix's ability to adapt and thrive in the face of competition. He also touched on Costco's resilience despite not being a major online player, emphasizing that the company generates most of its revenue from membership fees rather than product sales.

Costco's business model, which relies heavily on perishable and fast-turnover goods, has been less impacted by online competition compared to other retail sectors. Costco's value comes more from its real estate and membership fees than from actual sales. Regarding the Winter Olympics in Sochi, there are concerns about security, but the Russian government, which has much to lose, is expected to take extensive measures to ensure a successful event. The speaker is not a fan of figure skating at the Olympics due to its subjective judging, preferring sports with clear winners.

Learning from this episode of Motley Fool Money is the diverse range of stocks and industries discussed by the team. Bill Mann's team at Fullfunds.com was mentioned, and listeners were encouraged to sign up for their free monthly newsletter. Ron Gross brought up the high sugar content in Nutella and his bullish outlook on Apple (AAPL) ahead of their earnings report. Jeff Fisher highlighted Valmont Industries (VMI) as a long-term infrastructure play, while Jason Moser expressed interest in Dick's Sporting Goods (DKS) due to its market leadership and potential post-earnings opportunities. Overall, the team provided insights into various sectors and individual stocks, emphasizing the importance of staying informed and considering different investment opportunities.